By Lee A. Presser
Did last week’s Congressional debt deal, signed into law on Tuesday, Aug. 2, by President Obama, cause the credit rating agency Standard & Poor’s to downgrade America’s AAA rating?
The new law requires a reduction of $1 Trillion in discretionary spending over 10 years and requires the creation of a committee to propose another $1.8 Trillion in spending cuts during that same ten years ($1 Trillion = $1000 Billion).
$1 Trillion divided into 10 years is $100 Billion/year.
$1.8 Trillion divided into 10 years is $180 Billion/year.
Therefore, the deal requires a $280 Billion per year reduction in spending.
Sounds like a lot of money until we look at the following.
This month, the United States government will spend $100 to $150 Billion more than its income. The same thing happened the month before and the month before that and the month before that. Next month, the United States government will spend $100 to $150 Billion more than its income. The same thing will happen the month after that and the month after that and the month after that.
This has been happening every month for quite some time and will continue to happen with no end in sight.
The shortage is 1,200 to 1,800 Billion dollars every year ($1.2 to $1.8 Trillion). (That is what is referred to as the deficit.) Subtract the $280 Billion per year Congress has decided not to spend and we discover our government will still be overspending its income by 920 to 1,520 Billion dollars each year for the next ten years.
Those who think America can tax its way out of this problem should be asked, “Where in the private sector do they expect to find $77 to $127 Billion PER MONTH in additional taxes? (Bill Gates owns a total of $56 Billion and Warren Buffet owns $50 Billion. After taking all of it away from them, where does the Treasury get the money for the next month’s deficit?)
Now you begin to understand why the credit rating agency Standard & Poor’s is having trouble recommending American bonds as an exceptionally good loan risk. Exceptionally good loan risk is the meaning of the AAA rating.
To cover the $1200 to $1800 Billion per year shortage ($1.2 to $1.8 Trillion), Timothy Geithner, the Secretary of the U.S. Treasury, regularly issues bonds with you, me, and every other American as a co-signer on the note. To be fair, it should be stated that Secretary Geithner is just another in a long, long line of Treasury Secretaries to be part of that process.
Those of you who have taken a loan for a mortgage, a car, or used your credit card know that loan companies require you to pay interest on the outstanding balance. Interest gets paid first and then if there is any money left it is applied to the principal. The United States government is no exception.
U.S. Treasury debt now exceeds $14,300 Billion ($14.3 trillion). (That is what is referred to as the debt.) Since Oct. 1, 2010, the beginning of Fiscal Year 2011, the U.S. Treasury has paid its creditors $412.5 Billion in interest on that $14.3 Trillion debt. At that rate, by September 30, 2011 (the end of FY 2011) the U.S. Treasury may have paid out $495 Billion of your money in interest to its creditors.
Since Fiscal Year 1988, through the end of July 2011, our government has paid to its creditors $8,179,178,425,358.39 ($8.179 Trillion) in interest.
The larger the debt, the larger the interest cost, the less money we have left to spend on other things.
Before the recent debt law, it was expected that U.S. Treasury debt was going to increase by $10 Trillion over the next ten years to $24.3 Trillion. The new law reduces that increase to $7.2 Trillion over ten years to a total of $21.5 Trillion ($21,500 Billion).
If interest rates remain the same (which is unlikely) annual interest costs on the new total debt will be $744 Billion per year. That is money paid to creditors before the first soldier is paid, before the first bureaucrat is paid, before anything is paid from the tax money you paid IRS.
Does this explain the thought process behind Standard & Poor’s decision regarding the AA+ rating on U.S. Bonds?
There is an election next year. America’s future is in your hands.
Lee A. Presser